Professional Documents
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40 - External Environment
40 - External Environment
Document No.40
Donald Snodgrass, The Economic, Policy, and Regulatory Environment, (AIMS, 1996), 3,
[http://www.mip.org/pdfs/aims/ecopolic.pdf]
2. Macro-factors
2.1 Regulatory Environment
MFOs are regulated differently in each country: from little regulation (e.g. Russia2) to
more regulated (e.g. Bangladesh, West Africa, Egypt, Colombia, Peru, Bolivia3). Some
issues in microfinance regulation are highlighted below:
Sometimes MFOs, especially NGOs, believe that regulation will promote their
business and improve their operations.
Some NGOs, governments, and donors want financial licenses to be more widely
(and easily) available in order to expand savings services for the poor.
Donors and governments may think that setting up a special regulatory window
for microfinance will speed the emergence of sustainable MFOs.
In those countries, where MFOs are already taking deposits without licensing, the
central banks aim to license them in order to protect depositors.
Many MFOs charge high interest rates. Governments may view these rates as
exploitative and want to protect small borrowers from them.
For description and cases see Joost de la Rive Box, Microfinance in Russia, Policy Paper, (TACIS, April
2001).
3
Some examples on West Africa, Egypt, Colombia, and Bolivia etc. are given in the book by Joanna
Ledgerwood, Microfinance handbook: an institutional and financial perspective, (Washington, D.C.: The
World Bank, 1998).
Policies and regulations can affect MFOs either indirectly through their effects on
program clients or directly by limiting the MFOs programs.
I. Indirect Impact
Table 2.1 (see below), developed by Haggablade, Liedholm and Mead (1990), describes
policies and regulations that have important influences on micro and small enterprises.
Some of the most significant policies among them are those that work through factor
markets: these are exchange rates, tariffs, and interest rates. These policies influence the
prices businesses pay for capital, including the price of microcredit.
II. Direct Impact
Robert Peck Christen and Richard Rosenberg, The Rush to Regulate: Legal Frameworks for
Microfinance, CGAP Occasional Paper No. 4, April 2000,
[http://www.cgap.org/html/p_occasional_papers04.html]
5
Donald Snodgrass, The Economic, Policy and Regulatory Environment (AIMS Paper, Washington, D. C.:
Management Systems International, 1996)
[http://www.mip.org/pdfs/aims/ecopolic.pdf]
Adapted from Joanna Ledgerwood, Microfinance handbook: an institutional and financial perspective,
(Washington, D.C.: The World Bank, 1998), 23-25.
Table 2.1
Inventory Of Policies Affecting Employment And MSE Growth By Functional
Grouping
1. Trade policy
a. Import duties
b. Import quotas
c. Export taxes or subsidies
d. Exchange rates
e. Foreign exchange controls
2. Monetary policy
a. Money supply
b. Interest rate
c. Banking regulations
3. Fiscal policy
a. Government expenditure
(i) Infrastructure
(ii) Direct investment in production, marketing, or service enterprises
(iii) Government provision of services
(iv) Transfer payments
b. Taxes
(i) Business income/profits
(ii) Personal income
(iii) Payroll
(iv) Property
(v) Sales
4. Labor policies
a. Minimum wage laws
b. Labor codes covering working conditions, fringe benefits, etc.
c. Social security
d. Public sector wage policy
5. Output prices
a. Consumer prices
b. Producer prices
6. Direct regulatory controls
a. Enterprise licensing and regulation
b. Monopoly privileges
c. Land allocation and tenure
d. Zoning
e. Health regulations
Source: Haggblade, Liedholm and Mead (1986).
Increasing the wealth of a borrower makes it easier for her to repay her
loans. A borrower who is moderately wealthy, or at least liquid, and whose
income is rising, has a better ability to repay.
The incentive to repay is also important, as the poorer borrower has few
available sources of credit, and is thus strongly motivated to repay loans if
the availability of credit in the future depends on prompt repayment.
Inflation
The following tools may be used to protect an MFO from high or unstable inflation:
1) Loan size: A program is able to change loan sizes in response to inflation tends. If
the inflation increase is predicted, it would be better for a program to offer smaller
average loans.
2) Loan Denomination: This has become one of the most common ways to protect
funds from inflation in countries with unstable currencies. However, a program may
set up interest rates based on the dollar value of a loan. This system does not
completely protect against inflation since the U.S. dollar also experiences some
inflation every year.
Donald Snodgrass, The Economic, Policy and Regulatory Environment (AIMS Paper, Washington, D. C.:
Management Systems International, 1996), 9-10.
[http://www.mip.org/pdfs/aims/ecopolic.pdf]
3) Interest Rates: Effective loan interest rates should cover the inflation rate. However,
in reality the inflation level is floating. Hence, it is better to link interest rates with
inflation rates in order to upgrade interest as the rate of inflation changes.
4) Loan Terms: Programs should practice very short-term lending, when it is
impossible to set up floating interest rates according to currency exchange or inflation
rates. By doing so, they will reduce fund devaluation as loan conditions may be
updated in time.8
2.3 Physical Environment
Geographical areas with disadvantageous environmental conditions are usually poor and
lightly populated, posing a real challenge for microfinance development.
Yet a substantial fraction of humanity and a far larger share of poor people
does live in tropical regions, where, as Andrew Kamarck (1976) has pointed out,
environmental conditions pose many serious challenges to development that are
not encountered in temperate regions. Among the barriers to development
analyzed by Kamarck are rainfall and heat, low-quality soils, agricultural enemies
(weeds and insects, locusts, and others), lack of relevant agricultural research,
paucity of mineral deposits, a wide range of health hazards, and a lack of research
on how to overcome them. In their broadest application, these factors help to
explain why the great majority of tropical nations are poor and why most of the
worlds poor people live in tropical regions.
Countries with physical environments that pose difficulties for economic
development may be heavily populated because international migration is difficult
and people have nowhere else to go. Within particular countries, where barriers to
movement are far less severe, the most difficult regions tend to be lightly
populated.9
Charles Waterfield, Ann Duval, CARE Savings and Credit Sourcebook, (CARE, 1996), 30-31.
Donald Snodgrass, The Economic, Policy and Regulatory Environment, (AIMS Paper, Washington, D. C.:
Management Systems International, 1996), 5.
9
Establishing MFOs in such regions, especially in vast areas with low population density
(see Box 2.2), will require high operating costs, including transportation expenses to
reach clients in remote rural areas. Organizational staff will have to travel extensively,
which may reduce the organizations overall efficiency.
However, these operating costs can be minimized. The main way is through the choice of
an appropriate lending methodology. In areas of low client density, it may be possible to
apply one of the group lending approaches. These approaches do not require frequent
contacts with individual clients and delegate much of the loan management responsibility
to the clients themselves. A field agent is able to work with many clients at a time while
reducing marginal costs.
Economically active
population, %
Individual entrepreneurs, %
Micro-enterprises*, %
European
part
Ural
West
Siberia
East
Siberia
Far
East
63.8
14.0
10.5
6.2
5.6
60.0
73.8
14.4
9.9
13.4
8.8
4.6
4.1
7.3
4.1
Source: The Analysis of Supply and Demand on the Microfinance Services Market in Russia, (FINCA
International, Moscow, 2000).
10
Charles Waterfield, Ann Duval, CARE Savings and Credit Sourcebook, (CARE, 1996), 32.
Geetha Nagarajan, Microfinance in the Wake of Natural Disasters: Challenges and Opportunities,
(Development Alternatives, Inc., March 1998), 2-3, [http://www.mip.org/pdfs/mbp/disaster.pdf].
12
William Grant, Marketing in Microfinance Institutions: The State of the Practice, (Development
Alternatives, Inc. November 1999), 10.
11
3. Micro-factors
Whereas the macro-factors have a significant influence on both MFOs and enterprises,
the close ambience of an organization plays a very important role as well. Microenvironmental factors answer the following questions:
3.1 Competition
Until the late 1990s most MFOs found themselves in a near monopoly position. They
experienced competition for financial resources, but not for clients, as most MFOs even
now remain externally funded entities. Programs could treat the demand for their services
as unlimited. However, the situation has changed as well as concerns of the organizations
(See Table 3.1.1). Markets in Chile, Bolivia, Bangladesh and Uganda have begun to show
the signs of saturation. For instance, delinquency rates are increasing as market growth is
slowing.
13
Monica Brand, New product development for microfinance: evaluation and preparation (Bethesda, MA,
USA: Microenterprise Best Practices (MBP) Project, Development Alternatives USAID, 1998), 15,
[http://www.mip.org/pdfs/mbp/newprod1.pdf].
10
Competitive Stage
Objectives: To retain or increase market
share, while remaining profitable
Driving motivation: attracting the customer
Management focus: Internal issues remain,
but external focus is added: understanding
the external environment and adjusting
business strategy to it
Growth: Low growth likely
Benefits of competition:
Customers become price sensitive (clients care more about access than price) and
begin to show their preferences related to service adjustment:
i.
ii.
iii.
iv.
v.
vi.
vii.
14
11
Organizations that provide the access to financial services represent the formal,
semiformal, and informal sectors (Table 3.1.2). The difference is made between formal
and informal according to the existence of a legal environment and regulation that covers
the relations among lenders and depositors.
Table 3.1.2 Providers of financial services17
Formal Sector
Central bank
Semiformal Sector
Informal Sector
Savings and credit cooperatives Savings associations
Banks
Commercial banks
Merchant banks
Savings banks
Rural banks
Postal savings banks
Labor banks
Cooperative banks
Multipurpose cooperatives
Development banks
State-owned
Private
Credit unions
Cooperative quasi-banks
Village banks
Individual moneylenders
Commercial
Noncommercial (friends etc.)
Banques populaires
Development projects
Other nonbank institutions
16
Elisabeth Rhyne, Robert Peck Christen, Microfinance Enters the Marketplace, 19-22,
[http://www.mip.org/pdfs/usaid/MicrofinanceEnters.pdf]
17
Source: Food and Agriculture Organization 1995, 5. Taken from Joanna Ledgerwood, Microfinance
handbook: an institutional and financial perspective, (Washington, D.C.: The World Bank, 1998), 13.
12
Formal Sector
Finance companies
Term-lending institutions
Semiformal Sector
Informal Sector
Registered self-help groups and
savings clubs
Traders and shopkeepers
Nongovernmental organizations
(NGOs)
NGOs
13
Advantages
Public trust in safety and security
Banks can afford a great number of
branches
Lower cost of capital for clients
Large loan funds
Well trained staff
Disadvantages
Bureaucratic procedures and paperwork
Collateral requirements
Low accessibility for low-income
clients
Urban orientation
14
Advantages
Membership stimulates saving and
prevents clients from leaving
Good public image in history
Disadvantages
Membership charges
Savings first and credit second
Low accessibility for the poor
Rural and Agricultural credit cooperatives can lend directly to registered businesses or
farms as well as to individuals. The members are usually farmers and agricultural
entrepreneurs. These organizations are generally not large, designed to serve the needs of
a rural population, and do not have professional personnel.
NGOs
NGOs may belong either to the semiformal or informal sector. They are often legally
registered and subject to some state supervision. They serve the part of the market that is
not sufficiently profitable for commercial entities. Therefore, NGOs should be able to
identify their target clients, which is not easy in a competitive environment.
Table 3.1.5 Competitive Characteristics of NGOs
Advantages
Accessible to the poor
Less bureaucracy
Flexibility in terms
Constant access to growing loan sizes
Alternative forms of collateral
Disadvantages
Lack of professional staff and
management
Frequent repayments and meetings
Relatively high interest rates
15
Advantages
Credit terms are flexible, including
frequency of repayments
Little or no paperwork
Disadvantages
Semi-legal status of the lender
High interest rates
Young people may have a stronger intention and energy to improve their living
conditions by establishing their own businesses;
16
Lending to senior clients may bring additional risks since there is a probability of
the clients death before outstanding loans are paid off.
Gender
Women have large household obligations, as they are usually responsible for
family healthcare and education;
Women have fewer sources of collateral since the property rights often belong to
men;
Womens traditional activities include trade, services, sewing, textiles and food
manufacturing.
MFOs may have to spend time teaching the borrowers how to read numbers and
sign their names.
In urban areas clients are more likely to have a higher level of education;
The level of repayment may be higher in urban areas since MFOs can appoint
more frequent meetings with borrowers;
The market could also be identified according to the amount of capital owned by the
clients and their entrepreneurial skills (Table 3.2.1):
17
None
?
?
Capital
Low
+
+
Sufficient
-
Each group has a different demand for financial and educational resources; the group
with no capital is the most challenging. It requires large training and development efforts.
MFOs that work with this group often have difficulty reaching financial self-sufficiency.
The second group is a group of typical microfinance clients who lack access to capital.
Specific features of a program to work with this group are determined by other
environmental factors. The third group of clients meets traditional banking system
requirements. However, those clients without entrepreneurial skills may still apply to an
MFO program to gain training.
The expansion of client businesses and the maturation of client-lender relationships may
generate demand for new types of products or increase expectations about product quality
and variety. Adding new services may expand the organizations existing technologies.
Progress in this direction will improve the quality of microfinance institutions. 18
3.3 Donors
Donors may provide the following services to new or existing MFOs:
Lines of credit
18
Evolution of Credit Methodologies Concept Paper, (Microenterprise Best Practices Project, USAID),
[http://www.gdrc.org/icm/credit-methodology.html].
18
Technical assistance.19
Currently, many MFOs are funded by donor grants, received from multilateral
organizations - Microcredit Summit, The Consultative Group to Assist the Poorest
(CGAP) -, government agencies, such as the United States Agency for International
Development (USAID) and The Canadian International Development Agency (CIDA),
and private foundations (e.g. Ford Foundation).
The World Bank Group aims to increase access to financial services for low-income
households by addressing three principal areas: Fundamental framework (the policy,
legal and regulatory frameworks that allow innovative financial institutions to develop
and operate effectively), Institution building (exposure to and training in best practices
that banks and microfinance organizations need to expand their outreach and develop
sustainable operations, along with performance-based support for capacity building), and
Innovative approaches (leasing, lending and other products that the World Bank Group
utilizes to increase access to financial services).
The World Bank Group's country programs work in close collaboration with the World
Bank Institute (WBI), the Consultative Group to Assist the Poorest (CGAP), the Small
and Medium Enterprise (SME) Department, and the Sustainable Banking with the Poor
(SBP) program.
The Consultative Group to Assist the Poorest (CGAP) is a consortium of international
donor agencies and foundations committed to expanding the quality, quantity and
sustainability of financial services to poor and very poor clients. CGAP has a small
investment fund of about US$6-7 million (on an annual basis) to fund capacity building,
industry tools and services, and direct grants to microfinance organizations and networks.
CGAP funding is made in conjunction with its member donors.20
19
19
21
Muhammad Yunus, How Donor Funds Could Better Reach and Support Grassroots Microcredit
Programs Working Towards the Microcredit Summits Goal and Core Themes,
[http://gdrc.org/icm/summit/4-papers/donorpaperH.htm#Note%203]
22
Microfinance Sector Support Program: Request for Applications NO. 118-01-007, (USAID), 1.
23
Report on CIDAs Programming in Microfinance & Microenterprise Development, 16, [http://www.acdicida.gc.ca/cida_ind.nsf/eff12ba4cbb097c1852566ce00644c8a/f603fd89dd24fc508525684800719152/$FIL
E/micro-rept.pdf]
20
24
Mehnaz S. Safavian, Douglas H. Graham, Claudio Gonzales-Vega, The State of Microfinance Activity in
Russia: A Selective Review of Operational, Registration, and Regulatory Issues, (FINCA International,
1999), 17.
21